GLOBALSANTAFE CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-14634

GLOBALSANTAFE CORPORATION
(Exact name of registrant as specified in its charter)

Cayman Islands 98-0108989
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

777 N. Eldridge Parkway, Houston, Texas 77079-4493
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (281) 596-5100

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

The number of shares of the registrant's ordinary shares, par value $.01 per
share, outstanding as of July 31, 2002, was 235,107,322.

- --------------------------------------------------------------------------------

1

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS TO FORM 10-Q

QUARTER ENDED JUNE 30, 2002

Page
----

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Report of Independent Accountants 5

Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2002 and 2001 6

Condensed Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001 7

Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 9

Notes to Condensed Consolidated Financial Statements 10

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20

Item 3. Quantitative and Qualitative Disclosures About Market Risk 34

PART II - OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders 35

Item 6. Exhibits and Reports on Form 8-K 35

SIGNATURE 37

-----------------------------------

FORWARD-LOOKING STATEMENTS

Under the Private Securities Litigation Reform Act of 1995, companies are
provided a "safe harbor" for discussing their expectations regarding future
performance. We believe it is in the best interests of our shareholders and the
investment community to use these provisions and provide such forward-looking
information. We do so in this report and other communications. Forward-looking
statements are often but not always identifiable by use of words such as
"anticipate," "believe," "budget," "could," "estimate," "expect," "forecast,"
"intend," "may," "might," "plan," "predict," "project," and "should."

2

Our forward-looking statements include statements about the following
subjects: the estimated workforce reduction in connection with our recent
merger; our contract drilling backlog and the amount expected to be realized in
2002; our expectations regarding future conditions in the various geographic
markets in which we operate and the prospects for future work and dayrates for
our rigs in those markets; the dates our rigs that are under construction are
scheduled for delivery; the dates by which rigs undergoing planned maintenance
and upgrades are expected to return to work; our transition expenses, how much
we expect them to be, and when we expect them to be incurred; the possible
impact on our future financial position and results of operations as a result of
various pieces of proposed legislation; projected cash outlays, the timing of
such outlays and expected sources of funding in connection with rigs that are
under construction; the fact that we do not anticipate using stock to satisfy
future purchase obligations in connection with our Zero Coupon Convertible
Debentures; our estimated capital expenditures in 2002; our ability to meet all
of our current obligations, including working capital requirements, capital
expenditures and debt service, and the amount in excess of cash flow generated
from operations that we estimate we will use in 2002; the anticipated effect of
the required adoption of SFAS No. 143 in 2003 and the required adoption of SFAS
No. 146; and any other statements that are not historical facts.

Our forward-looking statements speak only as of the date of this report and
are based on currently available industry, financial, and economic data and our
operating plans. They are also inherently uncertain, and investors must
recognize that events could turn out to be materially different from our
expectations.

Factors that could cause or contribute to such differences include, but are not
limited to:

- the need to retain employees and/or add to our workforce due to
increased work, which can be the result of such things as changes in
general economic conditions, technological advances requiring
additional changes to our rigs, and additional regulatory
requirements;

- regional or worldwide demand for oil or natural gas and resulting
fluctuations in the price of oil or natural gas and the level of
activity in oil or natural gas exploration, development and
production;

- competition and market conditions in the offshore contract drilling
industry, including dayrates and utilization;

- work stoppages by or other disruptions involving shipyard workers;

- delays in construction, maintenance and upgrade projects and cost
overruns on such projects;

- the costs of relocating offices and large numbers of employees, which
can be influenced by changes in office construction plans and changes
in the relative costs of labor and/or real estate in different local
markets;

- the vagaries of the legislative process due to the unpredictable
nature of politics and national and world events, among other things;

- changes in oil and natural gas drilling technology or in our
competitors' drilling rig fleets that could make our drilling rigs
less competitive or require major capital investments to keep them
competitive;

3

- the adequacy of sources of liquidity;

- the effect of litigation and other contingencies; and

- such other factors as may be discussed in the "Risk Factors" section
under Items 1 and 2 and elsewhere in our Annual Report on Form 10-K
for the year ended December 31, 2001, and in our other reports filed
with the U.S. Securities and Exchange Commission.

YOU SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS. EACH
FORWARD-LOOKING STATEMENT SPEAKS ONLY AS OF THE DATE OF THE PARTICULAR
STATEMENT, AND WE DISCLAIM ANY OBLIGATION OR UNDERTAKING TO DISSEMINATE ANY
UPDATES OR REVISIONS TO OUR STATEMENTS, FORWARD-LOOKING OR OTHERWISE, TO REFLECT
CHANGES IN OUR EXPECTATIONS OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES
ON WHICH ANY SUCH STATEMENTS ARE BASED.

4

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of GlobalSantaFe Corporation

We have reviewed the accompanying condensed consolidated balance sheets of
GlobalSantaFe Corporation and subsidiaries as of June 30, 2002, and the related
condensed consolidated statements of income for each of the three and six-month
periods ended June 30, 2002 and 2001 and the condensed consolidated statements
of cash flows for the six-month periods ended June 30, 2002 and 2001. These
financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.

We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheets as of December
31, 2001, and the related consolidated statements of income, shareholders'
equity, and of cash flows for the year then ended (not presented herein); and in
our report dated March 14, 2002, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2001,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Houston, Texas
August 13, 2002

5

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)

Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
------ ------ ------ ------

Revenues:
Contract drilling $406.9 $223.6 $808.7 $412.9
Drilling management services 92.3 155.9 177.5 241.4
Oil and gas 2.5 3.0 4.2 9.3
------ ------ ------ ------
Total revenues 501.7 382.5 990.4 663.6
------ ------ ------ ------

Expenses:
Contract drilling 245.4 101.8 488.5 194.4
Drilling management services 88.8 145.6 166.3 230.5
Oil and gas 1.0 0.7 1.8 1.4
Depreciation, depletion and amortization 64.9 32.7 127.4 65.4
General and administrative 12.9 6.3 24.9 11.9
------ ------ ------ ------
Total operating expenses 413.0 287.1 808.9 503.6
------ ------ ------ ------

Operating income 88.7 95.4 181.5 160.0

Other income (expense):
Interest expense (14.3) (14.1) (28.6) (28.2)
Interest capitalized 4.3 -- 7.5 --
Interest income 3.8 3.1 8.2 6.0
Gain on sale of rig -- 35.1 -- 35.1
Other 0.5 -- (0.4) --
------ ------ ------ ------
Total other income (expense) (5.7) 24.1 (13.3) 12.9
------ ------ ------ ------

Income before income taxes 83.0 119.5 168.2 172.9

Provision for income taxes:
Current tax provision 13.3 4.9 25.5 7.6
Deferred tax provision (benefit) (3.7) 30.3 (7.8) 40.3
------ ------ ------ ------
Total provision for income taxes 9.6 35.2 17.7 47.9
------ ------ ------ ------

Net income $ 73.4 $ 84.3 $150.5 $125.0
====== ====== ====== ======

Earnings per ordinary share: (1)
Basic $ 0.31 $ 0.72 $ 0.64 $ 1.07
Diluted $ 0.31 $ 0.69 $ 0.63 $ 1.03

- --------
(1) Per share data for the three and six months ended June 30, 2001 has been
restated to reflect the effect of the exchange ratio established in the
merger agreement.

See notes to condensed consolidated financial statements.

6

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)

June 30, December 31,
2002 2001
--------- ------------

Current assets:
Cash and cash equivalents $ 676.3 $ 578.3
Marketable securities 126.4 129.6
Accounts receivable, net of allowances 355.5 376.3
Costs incurred on turnkey drilling projects in progress 5.5 5.0
Prepaid expenses 59.2 22.0
Future income tax benefits 3.3 2.3
Other current assets 9.2 26.5
-------- --------
Total current assets 1,235.4 1,140.0
-------- --------

Properties and equipment:
Rigs and drilling equipment, less accumulated
depreciation of $803.5 at June 30, 2002 and
$683.0 at December 31, 2001 4,002.7 3,891.2
Oil and gas properties, full-cost method, less accumulated
depreciation, depletion and amortization of $20.4
at June 30, 2002, and $19.3 at December 31, 2001 4.2 6.4
-------- --------

Net properties 4,006.9 3,897.6
Goodwill 379.8 382.6
Other assets 70.3 108.7
-------- --------
Total assets $5,692.4 $5,528.9
======== ========

See notes to condensed consolidated financial statements.

7

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
($ in millions)

June 30, December 31,
2002 2001
-------- ------------

Current liabilities:
Accounts payable $ 187.2 $ 151.6
Accrued compensation and related employee costs 40.4 50.9
Accrued income taxes 93.2 88.3
Accrued interest 8.9 8.9
Deferred income 16.1 22.6
Other accrued liabilities 93.5 99.6
-------- --------
Total current liabilities 439.3 421.9
-------- --------

Long-term debt 917.9 912.2
Capital lease obligation 17.7 17.0
Deferred income taxes 33.0 42.2
Other long-term liabilities 88.6 102.4
Commitments and contingencies (Note 4) -- --

Shareholders' equity:
Ordinary shares, $0.01 par value, 600,000,000 shares
authorized, 235,102,550 shares and 233,490,149 shares
issued and outstanding at June 30, 2002 and
December 31, 2001, respectively 2.4 2.3
Additional paid-in capital 2,976.7 2,949.1
Retained earnings 1,231.4 1,096.2
Accumulated other comprehensive loss (14.6) (14.4)
-------- --------
Total shareholders' equity 4,195.9 4,033.2
-------- --------
Total liabilities and shareholders' equity $5,692.4 $5,528.9
======== ========

See notes to condensed consolidated financial statements.

8

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)

Six Months Ended June 30,
------------------------------
2002 2001
------- -------

Cash flows from operating activities:
Net income $ 150.5 $ 125.0
Adjustments to reconcile net income to net
cash flow provided by operating activities:
Depreciation, depletion and amortization 127.4 65.4
Deferred income taxes (7.8) 40.3
Gain on sale of rig -- (35.1)
Decrease (increase) in accounts receivable 20.7 (6.4)
(Increase) decrease in prepaid expenses and other
current assets (44.4) 6.2
Increase (decrease) in accounts payable 13.8 (13.5)
Decrease in accrued liabilities (24.4) (6.2)
Other, net (3.8) (7.9)
------- -------
Net cash flow provided by operating activities 232.0 167.8
------- -------
Cash flows from investing activities:
Capital expenditures (216.0) (33.6)
Purchases of held-to-maturity marketable securities (223.2) (39.4)
Proceeds from maturities of held-to-maturity
marketable securities 226.4 --
Proceeds from sales of properties and equipment 69.2 5.0
------- -------
Net cash flow used in investing activities (143.6) (68.0)
------- -------
Cash flows from financing activities:
Dividend payments (15.2) --
Proceeds from issuance of ordinary shares 24.8 6.6
------- -------
Net cash flow provided by financing activities 9.6 6.6
------- -------
Increase in cash and cash equivalents 98.0 106.4
Cash and cash equivalents at beginning of period 578.3 144.3
------- -------
Cash and cash equivalents at end of period $ 676.3 $ 250.7
======= =======

See notes to condensed consolidated financial statements.

9

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

GlobalSantaFe Corporation (the "Company" or "GlobalSantaFe") is a major oil and
gas drilling contractor, owning or operating a fleet of over 100 drilling rigs.
The Company's fleet includes 13 floating rigs, 44 jackups, 31 land rigs and one
platform rig, and the Company or its affiliates also operate 11 platform rigs
and two semisubmersibles owned by others. The Company provides offshore oil and
gas contract drilling services to the oil and gas industry worldwide on a
daily-rate ("dayrate") basis. The Company also provides offshore oil and gas
drilling management services on either a dayrate or completed-project,
fixed-price ("turnkey") basis, as well as drilling engineering and drilling
project management services, and it participates in oil and gas exploration and
production activities.

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include
the accounts of GlobalSantaFe Corporation and its consolidated subsidiaries.
Intercompany accounts and transactions have been eliminated. Unless the context
otherwise requires, the term "Company" refers to GlobalSantaFe Corporation and
its consolidated subsidiaries. The condensed consolidated financial statements
and related footnotes are presented in U.S. dollars and in accordance with
accounting principles generally accepted in the United States of America.

The financial statements reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods. Such adjustments are considered to be of a normal recurring nature
unless otherwise identified. Interim-period results may not be indicative of
results for the full year. The year-end condensed consolidated balance sheet was
derived from audited financial statements but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. These interim financial statements should be read in conjunction with
the Company's audited financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001. Certain prior period
amounts have been reclassified to conform to the current presentation. Such
reclassifications had no effect on net income or shareholders' equity.

In April 2002, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on Issue 01-14, "Income Statement
Characterization of Reimbursement Received for 'Out-of-Pocket' Expenses
Incurred." The EITF consensus requires that all reimbursements received for
out-of-pocket expenses incurred be characterized as revenue in the income
statement. The Company previously recorded certain reimbursements received from
customers as a reduction of the related expenses incurred. As part of the
implementation of the consensus in this issue, the Company has reclassified
certain reimbursements received from customers for the three and six months
ended June 30, 2001 as revenues and related operating expenses to conform to the
current presentation. Operating income and net income for all periods presented
were not affected by this reclassification. The amounts of revenues and expenses
reclassified by segment for each period presented are as follows (in millions):

10

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
------ ----- ------ -----

Contract drilling $ 21.1 $ 4.7 $ 40.0 $ 9.1
Drilling management services 4.6 1.4 10.3 3.3
------ ----- ------ -----
$ 25.7 $ 6.1 $ 50.3 $ 12.4
====== ===== ====== ======

MERGER OF SANTA FE INTERNATIONAL CORPORATION AND GLOBAL MARINE INC.

On November 20, 2001, Santa Fe International Corporation ("Santa Fe
International") and Global Marine Inc. ("Global Marine") consummated their
business combination through the merger (the "Merger") of an indirect
wholly-owned subsidiary of Santa Fe International with and into Global Marine,
with Global Marine surviving the Merger as a wholly-owned subsidiary of Santa Fe
International. In connection with the Merger, Santa Fe International was renamed
GlobalSantaFe Corporation. At the effective time of the Merger, each issued and
outstanding share of common stock, par value $0.10 per share, of Global Marine
was converted into the right to receive 0.665 ordinary shares, par value $0.01
per share, of GlobalSantaFe ("GlobalSantaFe Ordinary Shares"). Approximately 118
million GlobalSantaFe Ordinary Shares were issued in connection with the Merger.

The Merger was accounted for as a purchase business combination in accordance
with accounting principles generally accepted in the United States of America.
As the former stockholders of Global Marine owned slightly more than 50% of the
Company after the Merger, Global Marine was considered the acquiring entity for
accounting purposes.

The condensed consolidated balance sheets as of June 30, 2002 and December 31,
2001 and the condensed consolidated statements of income for the three and six
months ended June 30, 2002 and statement of cash flows for the six months ended
June 30, 2002, represent the consolidated financial position, results of
operations and cash flows of the combined company. The condensed consolidated
statements of income for the three and six months ended June 30, 2001 and
statement of cash flows for the six months ended June 30, 2001, reflect the
historical results of Global Marine only. As a result, comparisons to prior year
data may not be meaningful. Share and per share data for the three and six
months ended June 30, 2001 have been restated to reflect the exchange ratio as
outlined in the merger agreement.

RESTRUCTURING COSTS

In connection with the Merger, the Company has implemented a restructuring
designed to streamline its organization and improve efficiency. This
restructuring involves an estimated workforce reduction of 94 positions, the
consolidation of Santa Fe International's administrative office in Dallas,
Global Marine's administrative office in Lafayette and Global Marine's
administrative office in Houston into a single administrative office in Houston,
and the consolidation of Santa Fe International's and Global Marine's North Sea
administrative offices in Aberdeen, Scotland. The employee functions affected
are primarily corporate support in nature and include accounting, information
technology, and employee benefits, among others. Approximately 68% of the
affected positions are located in Dallas, 26% are located in Houston, and the
remaining 6% are located in Aberdeen.

11

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Estimated restructuring costs associated with Global Marine were recorded as a
pretax charge in the fourth quarter of 2001. Payments related to these
restructuring costs for the six months ended June 30, 2002 are summarized as
follows:

Office Closures Directors'
Employee and Consolidation Separation and
Restructuring Costs: Severance Costs of Facilities Other Costs (2) Total
- -------------------- --------------- ------------- --------------- -----
($ in millions)
Houston and Lafayette Offices:
- ------------------------------

Number of employees - 24 (1)
Liability at 12/31/01 $ 8.2 $ 4.1 $ 2.5 $14.8
Payments (0.2) -- -- (0.2)
----- ----- ----- -----
Liability at 6/30/02 8.0 4.1 2.5 14.6
----- ----- ----- -----

Aberdeen Office:
- ----------------
Number of employees - 6 (1)
Liability at 12/31/01 0.9 0.2 0.1 1.2
Payments (0.4) -- -- (0.4)
----- ----- ----- -----
Liability at 6/30/02 0.5 0.2 0.1 0.8
----- ----- ----- -----

Total:
- ------
Number of employees - 30 (1)
Liability at 12/31/01 9.1 4.3 2.6 16.0
Payments (0.6) -- -- (0.6)
----- ----- ----- -----
Liability at 6/30/02 $ 8.5 $ 4.3 $ 2.6 $15.4
===== ===== ===== =====

- ---------------
(1) Based on current estimates.
(2) The liability at June 30, 2002 includes $2.0 million of special
termination costs related to certain retirement plans which are
included in Other long-term liabilities in the Condensed
Consolidated Blance Sheets.

Costs associated with Santa Fe International's employee severance and closure of
its Dallas and Aberdeen offices were recognized as a liability assumed in the
purchase business combination and included in the cost of acquisition in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations." Payments related to this liability
for the six months ended June 30, 2002 are summarized as follows:

Office Closures Directors'
Employee Employee and Consolidation Separation and
Purchase Price: Severance Costs Relocation Costs of Facilities Other Costs Total
- --------------- --------------- ---------------- ----------------- -------------- -----
($ in millions)

Number of employees - 64 (1)
Liability at 12/31/01 $ 9.5 $ 5.4 $11.5 $ 0.9 $27.3
Payments (9.4) (2.7) -- -- (12.1)
----- ----- ----- ----- -----
Liability at 6/30/02 $ 0.1 $ 2.7 $11.5 $ 0.9 $15.2
===== ===== ===== ===== =====

- ---------------
(1) Based on current estimates.

All accrued estimated restructuring costs associated with Global Marine and
costs associated with Santa Fe International's employee severance and closure of
its Dallas and Aberdeen offices are included in "Other

12

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

accrued liabilities" on the Condensed Consolidated Balance Sheets, except for
the special termination costs related to certain retirement plans noted above.

NOTE 2 - EARNINGS PER ORDINARY SHARE

A reconciliation of the numerators and denominators of the basic and diluted
per-share computations for net income follows:

Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
($ in millions, except per share data)

Net income (numerator):
Net income - Basic $ 73.4 $ 84.3 $ 150.5 $ 125.0
Add: Interest savings (net of tax)
on assumed conversion of Zero
Coupon Convertible Debentures - 1.7 - 3.4
----------- ----------- ----------- -----------
Net income - Diluted $ 73.4 $ 86.0 $ 150.5 $ $ 128.4
=========== =========== =========== ===========
Shares (denominator):
Ordinary Shares - Basic 234,631,618 117,403,690 234,118,107 117,304,600
Add:
Effect of employee stock options 3,788,092 2,267,732 3,504,556 2,466,829
Shares issuable upon assumed
conversion of Zero Coupon
Convertible Debentures - 4,875,062 - 4,875,062
----------- ----------- ----------- -----------
Ordinary Shares - Diluted 238,419,710 124,546,484 237,622,663 124,646,491
=========== =========== =========== ===========

Earnings per ordinary share:
Basic $ 0.31 $ 0.72 $ 0.64 $ 1.07
Diluted $ 0.31 $ 0.69 $ 0.63 $ 1.03

- -----------------
(1) Earnings per share data for the three and six months ended June 30, 2001
has been restated to reflect the effect of the exchange ratio of 0.665 as
established in the merger agreement.

The computation of diluted earnings per ordinary share for all periods presented
excludes outstanding options to purchase GlobalSantaFe Ordinary Shares with
exercise prices greater than the average market price of GlobalSantaFe Ordinary
Shares for the period, because the inclusion of such options would have the
effect of increasing diluted earnings per ordinary share (i.e. their effect
would be "antidilutive"). Options to purchase a total of 3,880,014 ordinary
shares and 7,815,771 ordinary shares were excluded from the computation of
diluted earnings per ordinary share for the three and six months ended June 30,
2002, respectively. Options to purchase a total of 2,773,725 ordinary shares and
1,711,392 ordinary shares were excluded from the computation of diluted earnings
per ordinary share for the three and six months ended June 30, 2001,
respectively. The number of antidilutive options for the 2001 periods has been
restated to reflect the effect of the exchange ratio of 0.665 established in the
merger agreement.

Diluted earnings per ordinary share for the three and six months ended June 30,
2002 also excludes 4,875,062 potentially dilutive shares issuable upon
conversion of the Company's Zero Coupon Convertible Debentures because the
inclusion of such shares would be antidilutive given the level of net income for
the three and six months ended June 30, 2002.

13

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Holders of the Zero Coupon Convertible Debentures have the right to require the
Company to repurchase the debentures as early as June 25, 2005. The Company may
pay the repurchase price with either cash or stock or a combination thereof. The
Company does not anticipate using stock to satisfy any such future purchase
obligation.

NOTE 3 - SEGMENT INFORMATION

Information by operating segment, together with reconciliations to the
consolidated totals, is presented in the following table:

- --------------
(1) Revenues for the periods shown reflect the application of the guidance set
forth in EITF Issue 01-14 (see Note 1).

Drilling management services operating results for the three and six months
ended June 30, 2002 and 2001 were favorably affected by downward revisions to
cost estimates for certain wells completed in prior periods. Such revisions
increased segment income by $1.9 million and $2.8 million, respectively, for the

14

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

three and six months ended June 30, 2002, and by $0.6 million and $2.0 million,
respectively, for the three and six months ended June 30, 2001.

NOTE 4 - COMMITMENTS AND CONTINGENCIES

CAPITAL COMMITMENTS

The Company has definitive contracts with PPL Shipyard PTE, Ltd. of Singapore
for construction of two ultra-deepwater semisubmersibles and two
high-performance jackups, with options for two additional similarly priced
semisubmersibles, and up to four additional jackups, the first two of which are
similarly priced. Projected cash outlays in connection with construction of the
two ultra-deepwater semisubmersibles, excluding capitalized interest, are
expected to total approximately $570 million, or $285 million per rig. Of the
$570 million, $171 million had been incurred as of June 30, 2002. Projected cash
outlays in connection with construction of the two high-performance jackups,
excluding capitalized interest, are expected to total approximately $254
million, or $127 million per rig. Of the $254 million, $94 million had been
incurred as of June 30, 2002.

LEGAL PROCEEDINGS

Applied Drilling Technology Inc. ("ADTI"), a wholly-owned subsidiary of the
Company, Patterson Energy Services, Inc. and Eagle Oilfield Inspection Services,
Inc. are defendants in a civil lawsuit filed in September 2001 by Newfield
Exploration Co. ("Newfield") and its insurance underwriters in the United States
District Court for the Eastern District of Louisiana. The lawsuit arises out of
damage caused to an offshore well owned by Newfield, which had been drilled by
ADTI in the U.S. Gulf of Mexico pursuant to a turnkey drilling contract and in
respect of which Patterson Services, Inc. and Eagle Oilfield Inspection
Services, Inc. also performed services. The well was damaged following
completion of a turnkey contract when the well head was struck by a fishing
vessel. The plaintiffs allege breach of contract, negligence and breach of
warranty on the part of the defendants and have sued for damages of
approximately $13 million. The Company believes that the claims are without
merit, and intends to vigorously pursue the defense of this matter.

In 1998, the Company entered into fixed-price contracts with Harland and Wolff
Shipbuilding and Heavy Industries Limited (the "Shipbuilder") totaling $315
million for the construction of two dynamically positioned, ultra-deepwater
drillships, the Glomar C.R. Luigs and the Glomar Jack Ryan, originally scheduled
for delivery in the fourth quarter of 1999 and first quarter of 2000,
respectively. Pursuant to two 20-year capital lease agreements, the Company
subsequently novated the construction contracts for the drillships to two
financial institutions (the "Lessors"), which now own the drillships and have
agreed to lease them to the Company.

The Company acted as the Lessors' construction supervisor and has paid on behalf
of the Lessors, or provided for the Lessors' payment of, all amounts it believes
were required under the terms of the contracts, including payments for all
approved change orders.

Because the Company was concerned about the Shipbuilder's financial viability
and the satisfactory completion of the drillships in a timely manner, in
November 1999 the Company agreed to provide additional funding to the
Shipbuilder for completion of the two drillships in exchange for certain

15

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

assurances by the Shipbuilder and its parent, Fred. Olsen Energy ASA (the
"Funding Agreement").

Under the terms of the Funding Agreement, the Company agreed to advance to the
Shipbuilder, without prejudice to any issues of liability under the shipbuilding
contracts, Pound Sterling57 million ($92.6 million) above the drillships' $315
million contract price. The Company also agreed to advance amounts equal to half
of subsequent cost overruns until the Company's total advances under the Funding
Agreement reached Pound Sterling65 million ($104.7 million). The Company and the
Lessors have advanced a total of Pound Sterling63.9 million ($103.1 million)
under the Funding Agreement, including Pound Sterling6.9 million ($10.5 million)
in connection with the Company's share of cost overruns.

In December 2001 and January 2002, the Shipbuilder served points of claim in the
existing arbitration proceedings in London for the shipbuilding contracts for
the Glomar C.R. Luigs and the Glomar Jack Ryan, respectively. The Shipbuilder
claims breach of contract in connection with the Company's obligations regarding
design of the drillships, the timely delivery to the Shipbuilder of
owner-furnished equipment and information relating thereto, and change orders.
The Shipbuilder also requested additional compensation for increases in the
steelweight of the drillships. The claims for the two drillships total Pound
Sterling169 million ($257.5 million) in addition to $43.6 million with respect
to the steelweight claims, in excess of the contract price. With the exception
of a small portion of the steelweight claim, the Company believes that the
claims are totally without merit.

The Funding Agreement did not settle any portion of the Shipbuilder's claims
referred to above. The agreement provides that the Shipbuilder will repay to the
Company amounts advanced under the Funding Agreement to the extent the amount of
the advanced funds exceeds any arbitration award in favor of the Shipbuilder and
that the Company will pay the Shipbuilder to the extent any arbitration award in
favor of the Shipbuilder exceeds the funds so advanced. In view of the current
financial condition of the Shipbuilder, collection from the Shipbuilder of any
amounts to which the Company may be entitled under the Funding Agreement is
doubtful.

In September 2000, the Shipbuilder requested that the arbitration panel consider
whether the Company had an obligation to pay the final delivery installment upon
completion of the vessel even if the Shipbuilder was in default of its
obligation to deliver the vessel, as the Company contends. The arbitration panel
issued a preliminary award requiring the payment to the Shipbuilder of $31.8
million of the $35.8 million contractual delivery installment and that amount
has been paid. The Shipbuilder has now requested that the Company be required to
pay the balance of the delivery installment ($4.0 million). Should the
arbitrators agree with the Shipbuilder, the net effect in that case will be that
the Company will have provided for the payment of the full contract price of
$315 million plus the cost of certain agreed change orders and related expenses.
This price excludes amounts totaling $103.1 million that the Company has
advanced under the Funding Agreement. The Company's liability for the breach of
contract and steelweight claims and the status of the Company advances under the
Funding Agreement will be determined in the arbitration proceedings that are
currently underway in London.

ENVIRONMENTAL MATTERS

The Company has certain potential liabilities in the area of claims under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
and similar state acts regulating cleanup of various waste disposal sites,
including those described below. CERCLA is intended to expedite

16

the remediation of hazardous substances without regard to fault. Potentially
responsible parties ("PRPs") for each site include present and former owners and
operators of, transporters to and generators of the substances at the site.
Liability is strict and can be joint and several.

The Company has been named as a PRP in connection with a site located in Santa
Fe Springs, California and maintained by Waste Disposal, Inc. ("WDI"). On August
18, 1994, the U.S. Environmental Protection Agency ("EPA"), issued an
administrative order for remedial design against eight potentially responsible
parties not including the Company. This order alleges that PRPs are responsible
for costs associated with the cleanup of the WDI site and requests that these
parties consent to undertake specific investigative and remedial measures for
the site. On March 31, 1997, the EPA amended the administrative order to modify
the scope of remedial work to be performed at the site and to add 13 additional
parties, including the Company. On April 29, 1997, the Company advised the EPA
of its intention to comply with the administrative order. In an effort to
minimize costs associated with its involvement in the site, the Company has
entered into a participation agreement with the other named PRPs. Under the
agreement, the Company and the other PRPs will provide monetary credit to some
PRPs for costs incurred before the 1997 amended order, will cooperate in common
response to any claims arising out of the administrative order, and will
allocate among the PRPs costs associated with their respective involvement with
the site. The Company and the other PRPs have agreed to a specific allocation
arrangement, which makes the Company responsible for approximately 7.7% of costs
related to site remediation. The total liability of the group would be reduced
by recoveries from other parties, including landowners, non-participating PRPs
and any contributions or credits from the EPA under its orphan share program.
The amount of damages or remediation costs to be shared under the allocation
arrangement will also depend on an agreement between the EPA and the PRPs
concerning the most cost effective and appropriate remediation of the site.

The Company has been named as a PRP in connection with a site located in Carson,
California formerly maintained by Cal Compact Landfill. On February 15, 2002,
the Company was served with a required 90-day notification that eight California
cities, on behalf of themselves and other PRPs ("Claimants"), intend to commence
an action against the Company under the Resource Conservation and Recovery Act
("RCRA"). Claimants advised the Company that, following expiration of the notice
period, they intend to file a RCRA claim against the Company seeking an order
requiring the performance of certain corrective actions and all other remedies
available under state and federal law.

Resolutions of other claims by the U.S. Environmental Protection Agency, the
involved state agency and/or PRPs are at various stages of investigation. These
investigations involve determinations of

- the actual responsibility attributed to the Company and the other PRPs at
the site;

- appropriate investigatory and/or remedial actions; and

- allocation of the costs of such activities among the PRPs and other site
users.

The Company's ultimate financial responsibility in connection with those sites
may depend on many factors, including

- the volume and nature of material, if any, contributed to the site for
which the Company is responsible;

17

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

- the numbers of other PRPs and their financial viability; and

- the remediation methods and technology to be used.

It is difficult to quantify with certainty the potential cost of these
environmental matters, particularly in respect of remediation obligations.
Nevertheless, based upon the information currently available, the Company
believes that its ultimate liability arising from all environmental matters,
including the liability for all other related pending legal proceedings,
asserted legal claims and known potential legal claims which are likely to be
asserted, is adequately accrued and should not have a material effect on the
Company's financial position or ongoing results of operations. Estimated costs
of future expenditures for environmental remediation obligations are not
discounted to their present value.

Other than the proceedings discussed above, there are no material pending legal
proceedings, other than ordinary routine litigation incidental to the business
of the Company, to which the Company is a party or of which any of its property
is the subject.

NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION - NONCASH INVESTING AND
FINANCING ACTIVITY

During the six months ended June 30, 2002, the Company incurred approximately
$21.9 million of capital expenditures related to its rig expansion program that
had been accrued but not paid as of June 30, 2002. These amounts are included in
Accounts payable in the Condensed Consolidated Balance Sheet at June 30, 2002.

In June 2002, the Company's Board of Directors declared a regular quarterly cash
dividend in the amount of $0.0325 per ordinary share, payable to shareholders of
record as of the close of business on June 28, 2002. The dividend in the amount
of $7.6 million was paid on July 15, 2002.

In June 2001, the Company completed the sale of the Glomar Beaufort Sea I
concrete island drilling system to Exxon Neftegas Limited for $45.0 million. The
Company received $5.0 million in cash at closing with the remainder of the
purchase price in the amount of $40.0 million, plus interest, being due on or
before March 1, 2003. The Company received approximately $42.0 million,
including accrued interest, during the first quarter of 2002, representing full
payment of the remaining purchase price.

NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS

In 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142,
"Goodwill and Other Intangible Assets", SFAS No. 143, "Accounting for Asset
Retirement Obligations" and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." In May 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections." In July 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." The Company
adopted the provisions of SFAS No. 142 and SFAS No. 144 effective January 1,
2002. The Company adopted SFAS No. 145 in the second quarter of 2002.

SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their initial recognition. The provisions of SFAS No. 142:

18

GLOBALSANTAFE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

o Eliminate the amortization of goodwill and indefinite-lived intangible
assets;
o Require that goodwill and indefinite-lived intangible assets be tested at
least annually for impairment (and in interim periods if certain events
occur indicating that the carrying value of goodwill and/or
indefinite-lived intangible assets may be impaired); and
o Require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill.

At June 30, 2002, Goodwill in the Company's Condensed Consolidated Balance Sheet
totaled approximately $379.8 million, substantially all of which was recorded in
connection with the Merger. All of the goodwill recorded in connection with the
Merger has been allocated to the Company's contract drilling segment. The
Company has completed its goodwill impairment testing for 2002 and will not be
required to record a goodwill impairment loss for 2002. The amortization of
goodwill existing before the Merger was immaterial.

SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144, among other things:

o Establishes criteria to determine when a long-lived asset is held for sale,
including a group of assets and liabilities that represents the unit of
accounting for a long-lived asset classified as held for sale;
o Provides guidance on the accounting for a long-lived asset if the criteria
for classification as held for sale are met after the balance sheet date
but before the issuance of the financial statements; and
o Provides guidance on the accounting for a long-lived asset classified as
held for sale.

The adoption of SFAS No. 144 did not have a material impact on the Company's
results of operations, financial position or cash flows.

SFAS No. 145, among other things, addresses the criteria for the classification
of extinguishment of debt as an extraordinary item and addresses the accounting
treatment of certain sale-leaseback transactions. The adoption of SFAS No. 145
did not have a material impact on the Company's results of operations, financial
position or cash flows.

SFAS No. 143 establishes accounting standards for the recognition and
measurement of liabilities in connection with asset retirement obligations, and
is effective for fiscal years beginning after June 15, 2002. The Company does
not anticipate that the required adoption of SFAS No. 143 in 2003 will have a
material effect on its results of operations, financial position or cash flows.

SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, rather than the
date of an entity's commitment to an exit plan. The provisions of this statement
are effective for exit or disposal activities that are initiated after December
31, 2002. The Company does not anticipate that the required adoption of SFAS No.
146 will have a material effect on its results of operations, financial position
or cash flows.

19

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The Company is a major oil and gas drilling contractor, owning or operating a
high quality, technologically advanced fleet of over 100 drilling rigs. The
Company's diversified fleet currently includes 13 floating rigs, 44 jackups, 31
land rigs and one platform rig, and the Company or its affiliates also operate
11 platform rigs and two semisubmersibles owned by others. The Company provides
offshore oil and gas contract drilling services to the oil and gas industry
worldwide on a daily-rate ("dayrate") basis. The Company also provides offshore
oil and gas drilling management services on either a dayrate or
completed-project, fixed-price ("turnkey") basis, as well as drilling
engineering and drilling project management services, and it participates in oil
and gas exploration and production activities.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

The Company's consolidated financial statements are impacted by the accounting
policies used and the estimates and assumptions made by management during their
preparation. These policies, estimates and assumptions affect the carrying
values of assets and liabilities and disclosures of contingent assets and
liabilities at the balance sheet date and the amounts of revenues and expenses
recognized during the period. Actual results could differ from such estimates
and assumptions. For a discussion of the critical accounting policies and
estimates that the Company uses in the preparation of its condensed consolidated
financial statements, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.

MERGER WITH SANTA FE INTERNATIONAL

On November 20, 2001, Global Marine Inc. ("Global Marine") merged with a
subsidiary of Santa Fe International Corporation ("Santa Fe International" or
"Santa Fe") and became a wholly-owned subsidiary of Santa Fe International,
which was renamed GlobalSantaFe Corporation at the time of the Merger.

The Merger was accounted for as a purchase business combination in accordance
with accounting principles generally accepted in the United States of America.
As the former stockholders of Global Marine owned slightly more than 50% of the
Company after the Merger, Global Marine was considered the acquiring entity for
accounting purposes. The Company's results of operations for the three and six
months ended June 30, 2002 represent the operations of the combined company. The
Company's results of operations for the comparable periods of 2001 represent the
operations of Global Marine only.

RESTRUCTURING COSTS

In connection with the Merger, the Company has implemented a restructuring
designed to streamline its organization and improve efficiency. This
restructuring involves an estimated workforce reduction of 94 positions, the
consolidation of Santa Fe International's administrative office in Dallas,
Global Marine's administrative office in Lafayette and Global Marine's
administrative office in Houston into a single administrative office in Houston,
and the consolidation of Santa Fe International's and Global Marine's North Sea
administrative offices in Aberdeen, Scotland. The employee functions affected
are primarily corporate support in nature and include accounting, information
technology, and employee benefits, among others. Approximately 68% of the
affected positions are located in Dallas, 26% are located in Houston, and the
remaining 6% are located in Aberdeen.

20

Estimated restructuring costs associated with Global Marine were recorded as a
pretax charge in the fourth quarter of 2001. Payments related to these
restructuring costs for the six months ended June 30, 2002 are summarized as
follows:

Office Closures Directors'
Employee and Consolidation Separation and
Restructuring Costs: Severance Costs of Facilities Other Costs (2) Total
- -------------------- --------------- ------------------ --------------- -----
($ in millions)

Houston and Lafayette Offices:
- ------------------------------
Number of employees - 24 (1)
Liability at 12/31/01 $ 8.2 $ 4.1 $ 2.5 $14.8
Payments (0.2) -- -- (0.2)
----- ----- ----- -----
Liability at 6/30/02 8.0 4.1 2.5 14.6
----- ----- ----- -----

Aberdeen Office:
- ----------------
Number of employees - 6 (1)
Liability at 12/31/01 0.9 0.2 0.1 1.2
Payments (0.4) -- -- (0.4)
----- ----- ----- -----
Liability at 6/30/02 0.5 0.2 0.1 0.8
----- ----- ----- -----

Total:
- ------
Number of employees - 30 (1)
Liability at 12/31/01 9.1 4.3 2.6 16.0
Payments (0.6) -- -- (0.6)
----- ----- ----- -----
Liability at 6/30/02 $ 8.5 $ 4.3 $ 2.6 $15.4
===== ===== ===== =====

(1) Based on current estimates.
(2) The liability at June 30, 2002 includes $2.0 million of special
termination costs related to certain retirement plans which are
included in Other long-term liabilities in the Condensed
Consolidated Blance Sheets.

Costs associated with Santa Fe International's employee severance and closure of
its Dallas and Aberdeen offices were recognized as a liability assumed in the
purchase business combination and included in the cost of acquisition in
accordance with the provisions of SFAS No. 141, "Business Combinations."
Payments related to this liability for the six months ended June 30, 2002 are
summarized as follows:

Office Closures Directors'
Employee Employee and Consolidation Separation and
Purchase Price: Severance Costs Relocation Costs of Facilities Other Costs Total
- --------------- --------------- ---------------- ----------------- --------------- -----
($ in millions)

Number of employees - 64 (1)
Liability at 12/31/01 $ 9.5 $ 5.4 $11.5 $ 0.9 $27.3
Payments (9.4) (2.7) -- -- (12.1)
----- ----- ----- ----- -----
Liability at 6/30/02 $ 0.1 $ 2.7 $11.5 $ 0.9 $15.2
===== ===== ===== ===== =====

(1) Based on current estimates.

All accrued estimated restructuring costs associated with Global Marine and
costs associated with Santa Fe International's employee severance and closure of
its Dallas and Aberdeen offices are included in "Other accrued liabilities" on
the accompanying Condensed Consolidated Balance Sheets, except for the special
termination costs related to certain retirement plans noted above.

21

OPERATING RESULTS

The Company's results of operations for the three and six months ended June 30,
2002 represent the operations of the combined company. The Company's results of
operations for the comparable periods of 2001 represent the historical
operations of Global Marine only. As a result, comparisons to prior year data
may not be meaningful.

In April 2002, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on Issue 01-14, "Income Statement
Characterization of Reimbursement Received for 'Out-of-Pocket' Expenses
Incurred." The EITF consensus requires that all reimbursements received for
out-of-pocket expenses incurred be characterized as revenue in the income
statement. The Company previously recorded certain reimbursements received from
customers as a reduction of the related expenses incurred. As part of the
implementation of the consensus in this issue, the Company has reclassified
certain reimbursements received from customers for the three and six months
ended June 30, 2001 as revenues and related operating expenses to conform to the
current presentation. Operating income and net income for all periods presented
were not affected by this reclassification. The amounts of revenues and expenses
reclassified by segment for each period presented are as follows (in millions):

Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
-------- --------- --------- --------

Contract drilling $ 21.1 $ 4.7 $ 40.0 $ 9.1
Drilling management services 4.6 1.4 10.3 3.3
------ ------ ------ ------
$ 25.7 $ 6.1 $ 50.3 $ 12.4
====== ====== ====== ======

SUMMARY

Data relating to the Company's operations by business segment follows (dollars
in millions):

Three Months Ended Six Months Ended
June 30, June 30,
---------------------- Increase / ---------------------- Increase /
2002 2001 (Decrease) 2002 2001 (Decrease)
--------- ---------- ----------- ---------- ---------- ----------

Revenues:
Contract drilling $408.5 $228.5 79 % $812.6 $422.0 93 %
Drilling management services 95.1 158.9 (40)% 182.3 245.3 (26)%
Oil and gas 2.5 3.0 (17)% 4.2 9.3 (55)%
Less: Intersegment revenues (4.4) (7.9) (44)% (8.7) (13.0) (33)%
------ ------ ------ ------
$501.7 $382.5 31 % $990.4 $663.6 49 %
====== ====== ====== ======

Operating income:
Contract drilling $ 97.9 $ 90.0 9 % $195.4 $155.1 26 %
Drilling management services 3.5 10.3 (66)% 11.2 10.8 4 %
Oil and gas 0.9 1.8 (50)% 1.3 6.8 (81)%
Corporate expenses (13.6) (6.7) 103 % (26.4) (12.7) 108 %
------ ------ ------ ------
$ 88.7 $ 95.4 (7)% $181.5 $160.0 13 %
====== ====== ====== ======

22

Operating income for the second quarter of 2002 decreased by $6.7 million to
$88.7 million from $95.4 million for the second quarter of 2001, due primarily
to reduced turnkey drilling activity, lower dayrates in the U.S. Gulf of Mexico,
lower oil and gas spot prices in the second quarter of 2002 and an increase in
corporate expenses. These decreases were offset in part by the inclusion of the
operations of the Santa Fe drilling fleet.

Operating income for the six months ended June 30, 2002 increased by $21.5
million to $181.5 million from $160.0 million for the same period in 2001 due
primarily to the operations of the Santa Fe drilling fleet, offset in part by
lower dayrates in the U.S. Gulf of Mexico, lower oil and gas spot prices,
reduced turnkey drilling activity and an increase in corporate expenses.
Operating income for the Company's drilling management services segment for the
six months ended June 30, 2001 includes a $4.1 million loss recorded in the
first quarter of 2001 on a turnkey well drilled offshore Louisiana.

In February 2002, the Company sold the Key Bermuda jackup drilling rig to Nabors
Drilling International Limited for approximately $29 million, less selling costs
of approximately $5 million. The carrying value of the Key Bermuda was adjusted
to its estimated market value in the consolidated financial statements of the
Company at the time of the Merger and, therefore, no gain or loss was recorded
as a result of this sale.

In June 2001, the Company completed the sale of the Glomar Beaufort Sea I
concrete island drilling system to Exxon Neftegas Limited for $45.0 million,
resulting in a pretax gain in the amount of $35.1 million.

The Company's contract drilling backlog at June 30, 2002 totaled approximately
$1.2 billion, of which approximately $571 million is expected to be realized in
2002. Contract drilling backlog at December 31, 2001 was $1.4 billion.

MARKET CONDITIONS

The drilling business has historically been cyclical, marked by periods of low
demand, excess rig supply and low dayrates, followed by periods of high demand,
short rig supply and increasing dayrates. These cycles are highly volatile and
are influenced by a number of factors, including oil and gas prices, the
spending plans of the Company's customers and the highly competitive nature of
the offshore drilling industry. Rig markets which appear to have stabilized at a
certain level of utilization and dayrates can change swiftly and dramatically,
making it difficult to predict trends or conditions in the market. A summary of
market conditions in the Company's areas of operations follows:

North Sea. The Company currently operates five semisubmersibles, five heavy-duty
harsh environment jackups, three cantilevered jackups and a platform rig in the
North Sea market. Another cantilevered jackup has recently been relocated to
this market and is undergoing required modifications. One of the Company's
semisubmersibles is currently idle and another has obtained a commitment in West
Africa and is expected to depart the North Sea in the fourth quarter of 2002.
The other three semisubmersibles have contracts that expire before December 2002
and presently do not have any follow on contracts. Two of the cantilevered
jackups and three of the heavy duty harsh environment jackups also have
contracts that expire prior to year end 2002. Utilization and dayrates for both
jackups and semisubmersibles have declined in this market following the
announcement of tax law changes in the United Kingdom. The Company expects
continued weakness in this market and anticipates that several of its rigs
currently under contract in this

23

area will either receive lower dayrates or be idle when their current contracts
expire.

Gulf of Mexico. The Company operates ten cantilevered jackups, two
semisubmersibles and three ultra-deepwater (water depths greater than 7,000 ft.)
drillships in this market. The Gulf of Mexico market for cantilevered jackups is
characterized by short-term contracts, and dayrates have been improving as rigs
roll over to new contracts. The Company is currently relocating a cantilevered
jackup from offshore Trinidad to the Gulf of Mexico. One of the Company's
semisubmersibles in the Gulf of Mexico is presently idle and is expected to
remain idle through most of the third quarter of 2002. The other semisubmersible
is on a short-term contract that expires in the third quarter and the Company is
pursuing additional work for this rig outside of the Gulf of Mexico. The
deepwater (water depths greater than 5,000 ft. and inclusive of ultra-deepwater)
market in the U.S. Gulf of Mexico appears to be somewhat oversupplied for at
least the short term. There are presently fewer oil companies pursuing
operations in ultra-deepwater, and several oil companies with deepwater rigs
under contract have offered them to other oil companies on a subcontract basis.
During 2003 and 2004, a significant percentage of the world's deepwater rig
fleet faces contract expirations. According to industry estimates, seven jackups
and six semisubmersibles will be added to the worldwide drilling fleet by the
end of 2004. Of the Company's three ultra-deepwater drillships in the Gulf of
Mexico, one contract expires in the first quarter of 2003 and the other two
contracts expire in the third quarter of 2003. The Company can make no
assurances that it will be able to obtain new contracts for these drillships
when their current contracts expire or that any new contracts will be at
comparable dayrates.

West Africa. The Company currently operates one drillship, one semisubmersible
and eight cantilevered jackups in this market. Jackup utilization and dayrates
remain stable in this market and only three of the Company's jackups have
contracts that expire before year end 2002. However, the softer market in the
North Sea may result in downward pressure on the West Africa market. The Company
has recently obtained a 13-month commitment for its semisubmersible in this
market, but its drillship is currently idle and is not expected to work during
the remainder of 2002.

Middle East/Mediterranean. The Company operates six jackups in the Middle East
region and two jackups in the Mediterranean region. Both markets appear to
generally be stable, and only one of the Company's rigs has a contract that
expires prior to year end 2002.

Southeast Asia. The Company operates five cantilevered jackups in Southeast
Asia. Although the market is generally balanced in this region, the Company has
observed a reduction in dayrates in recent contract placements.

Other. In Northeast Canada, the Company operates one semisubmersible and one
heavy duty harsh environment jackup. The jackup is under contract until the
fourth quarter of 2003, and the outlook for additional work for the
semisubmersible following expiration of its current contract in the third
quarter of 2002 currently appears favorable. In Trinidad, the Company operates
one cantilevered jackup under long-term contract.

Land drilling fleet. The Company operates 30 land drilling rigs (Rig 159,
located in the Middle East, is held for sale and is not considered part of the
active fleet), with 18 of these located in the Middle East, four in North Africa
and eight in Venezuela. Three of the active rigs in the Middle East are idle,
while utilization and dayrates for the remainder of the Middle Eastern and North
African rigs remain stable. Contracts on six of these rigs terminate between now
and the end of the year. The eight land rigs located

24

in Venezuela are currently idle due to political uncertainty in that country,
which has led most oil and gas exploration companies there to discontinue their
drilling operations. The Company currently expects these eight rigs to remain
idle at least through the third quarter of 2002

FUTURE MARKET FOR NEWBUILDS

The first of the Company's two high-performance jackups currently under
construction is scheduled for delivery in the first quarter of 2003, while the
first of two ultra-deepwater semisubmersibles, also under construction, is
scheduled for delivery in the fourth quarter of 2003. The Company's ability to
obtain contracts for its newbuild rigs and the terms of such contracts will be
dependent on market conditions at the time these rigs are available for
contract. While the Company believes that its newbuild rigs will have
substantial advantages in efficiency and capability over competitive equipment
in the industry, it can make no assurances that it will be able to obtain
contracts for all of its new rigs or that the contract terms will be similar to
those for similar equipment in current market conditions.

INSURANCE

As a result of poor underwriting results suffered by the insurance industry over
the past few years and the catastrophic events of September 11, 2001, the
Company incurred significant premium and deductible increases in its insurance
coverage upon renewal of its insurance program in June 2002.

The Company maintains insurance coverage against certain general and marine
liabilities, including liability for personal injury, in the amount of $500
million. This general and marine liability coverage now includes a $250,000 per
occurrence deductible with an additional aggregate deductible for protection and
indemnity coverage for the period from July 2002 to December 2003 of $2.8
million for amounts exceeding the per occurrence deductibles. The Company also
continues to separately insure its rigs and related equipment against certain
marine and other perils resulting in property damages under hull and machinery
policies. The Company's hull and machinery policy deductible has increased from
approximately $300,000 per occurrence to one percent of the insured value of the
drilling rig covered, subject to a minimum of $1.0 million and a maximum of $2.5
million. The Company continues with its practice of insuring each active rig for
its market value, which does not necessarily cover all costs required to replace
each rig with a newly constructed one.

With respect to turnkey drilling operations, the Company purchases insurance to
cover well control expense, pollution liability and re-drill expense in an
amount normally not less than $50 million per occurrence. The Company's
deductible for well-control insurance has increased from $200,000 per occurrence
to $1.0 million per occurrence with an additional annual aggregate deductible of
$5.0 million for amounts exceeding the per occurrence deductibles.

The Company believes that its policy of purchasing insurance coverage is
consistent with its industry peers for the types, amounts and limits of
insurance maintained. The occurrence of a significant event, however, that is
not fully insured against could materially and adversely affect the Company's
operations, cash flows and financial condition. For a discussion of this and
other risk factors affecting the Company's operations, see "Risk Factors - The
Company's Business Involves Numerous Operating Hazards and It is Not Fully
Insured against All of Them" in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.

25

CONTRACT DRILLING OPERATIONS

Data with respect to the Company's contract drilling operations follows (dollars
in millions, except average revenues per day):

Three Months Ended Six Months Ended
June 30, June 30,
----------------------- Increase/ ----------------------- Increase/
2002 2001 (Decrease) 2002 2001 (Decrease)
---------- ---------- ------------ ---------- ----------- -----------

Contract drilling revenues
by area (1):
North Sea $ 126.2 $ 31.7 298 % $ 242.7 $ 50.0 385 %
U.S. Gulf of Mexico 96.2 110.5 (13)% 188.1 213.1 (12)%
Middle East 56.4 - N/A 106.8 - N/A
West Africa 47.5 37.4 27 % 97.2 66.1 47 %
South America 21.6 43.4 (50)% 60.5 83.2 (27)%
Far East 26.1 - N/A 48.4 - N/A
Other 34.5 5.5 527 % 68.9 9.6 618 %
------- ------- ------- -------
$ 408.5 $ 228.5 79 % $ 812.6 $ 422.0 93 %
======= ======= ======= =======

Average rig utilization:
Marine rigs 89% 99% 89% 94%
Land rigs 69% N/A 75% N/A

Average revenues per day:
Marine rigs $72,600 $75,500 $72,600 $73,400
Land rigs $17,000 N/A $17,200 N/A

- ------------
(1) Includes revenue earned from affiliates.

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Contract drilling revenues increased $180.0 million to $408.5 million for the
second quarter of 2002 compared to $228.5 million for the 2001 second quarter,
due primarily to the addition of the Santa Fe International rigs to the
Company's drilling fleet. Excluding the effects of the inclusion of the Santa Fe
International rigs, contract drilling revenues decreased by approximately $39.6
million due primarily to lower dayrates and utilization in the U.S. Gulf of
Mexico, along with lower utilization in West Africa and South America.

The Company's offshore utilization rates for the second quarter of 2002 averaged
94% for its rigs in the U.S. Gulf of Mexico, 84% in West Africa, 94% in the
North Sea, 62% in South America and 100% in the Middle East. This compares with
Global Marine's second quarter 2001 average utilization of 100% in the U.S. Gulf
of Mexico and West Africa, 98% in the North Sea and 100% in South America.
Global Marine's offshore fleet did not operate in the Middle East during the
second quarter of 2001. The Company's land drilling fleet averaged 69%
utilization in the second quarter of 2002. Global Marine had no land drilling
operations in 2001.

26

The Company's results for the quarter ended June 30, 2002 reflect downtime on
seven of the Company's offshore rigs at various times during the quarter for
planned maintenance and upgrades. Four of these rigs have since returned to work
and the Company expects at least two of the remaining three rigs to be working
by the end of the third quarter of 2002.

The Company's operating profit margin for contract drilling operations decreased
to 24% for the second quarter of 2002 from Global Marine's 39% for the second
quarter of 2001 due primarily to lower dayrates in the U.S. Gulf of Mexico and
the addition of land drilling operations as a result of the Merger, along with
an increase in depreciation expense due to the adjustment of the carrying values
of the Santa Fe International rigs to their estimated market value in connection
with the Merger. Land operations have historically operated at substantially
lower margins than the Company's offshore fleet. Operating expenses for the
Global Marine rigs increased by approximately $8.8 million from the 2001 second
quarter, due primarily to increases in reimbursable expenses per EITF Issue
01-14 as discussed above, labor and depreciation expense, along with higher
repair and maintenance expense due in part to work performed on certain of the
rigs discussed above.

The Company recorded approximately $5.3 million of "transition expenses" related
to its contract drilling operations during the second quarter of 2002, which
represent costs incurred as part of the integration of the operations of Global
Marine and Santa Fe International. Such costs are not considered to be
indicative of the Company's ongoing operations.

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Contract drilling revenues increased by $390.6 million to $812.6 million for the
six months ended June 30, 2002 compared to $422.0 million for the six months
ended June 30, 2001, due primarily to the addition of the Santa Fe International
rigs to the Company's drilling fleet. Excluding the effects of the inclusion of
the Santa Fe International rigs, contract drilling revenues decreased by
approximately $17.7 million due primarily to lower dayrates in the U.S. Gulf of
Mexico along with lower utilization in South America and West Africa.

The Company's offshore utilization rates for the six months ended June 30, 2002
averaged 93% for its rigs in the U.S. Gulf of Mexico, 83% in West Africa, 91% in
the North Sea, 81% in South America and 95% in the Middle East. This compares
with Global Marine's 2001 average utilization of 98% in the U.S. Gulf of Mexico,
93% in West Africa, 87% in the North Sea and 100% in South America. Global
Marine's offshore fleet did not operate in the Middle East during 2001. The
Company's land drilling fleet averaged 75% utilization for the six months ended
June 30, 2002. Global Marine had no land drilling operations in 2001.

The Company's operating profit margin for contract drilling operations decreased
to 24% for the first half of 2002 from Global Marine's 37% for the comparable
period of 2001 due primarily to lower dayrates in the U.S. Gulf of Mexico, the
addition of land drilling operations and the increase in depreciation expense
noted in the discussion of the second quarter results above. Operating expenses
for the Global Marine rigs increased by approximately $34.9 million from the
2001 period, due primarily to increases in labor, repair and maintenance
expense, reimbursable expenses per EITF Issue 01-14 as discussed above, and
depreciation expense.

27

The Company recorded approximately $11.1 million of "transition expenses"
related to its contract drilling operations during the first half of 2002, which
represent costs incurred as part of the integration of the operations of Global
Marine and Santa Fe International. Such costs are not considered to be
indicative of the Company's ongoing operations. The Company expects to incur a
total of $11.8 million of transition expenses related to its contract drilling
operations, all of which is expected to be incurred in 2002.

Along with the addition of the Santa Fe International drilling fleet, the
mobilization of rigs between the geographic areas shown in the preceding table
also affected each area's revenues over the periods indicated. Specifically,
Global Marine mobilized one jackup from West Africa to the U.S. Gulf of Mexico
in February 2001, one drillship from Trinidad to the U.S. Gulf of Mexico in May
2001, one semisubmersible from Canada to the North Sea in May 2001, one jackup
from the U.S. Gulf of Mexico to West Africa in July 2001 and one jackup from the
U.S. Gulf of Mexico to Trinidad in September 2001. Subsequent to the Merger, the
Company mobilized one jackup from the Gulf of Mexico to Trinidad in December
2001.

As of August 1, 2002, 15 of the Company's offshore rigs were located in the
North Sea, 15 were located in the U.S. Gulf of Mexico, with one rig currently en
route, 10 were offshore West Africa, six were in the Middle East, six were in
Southeast Asia, two were offshore North Africa, two were off the east coast of
Canada and one was offshore Trinidad.

As of August 1, 2002, 18 of the Company's 30 active land rigs were located in
the Middle East, eight were in South America and four were in North Africa (Rig
159 is held for sale and is not considered part of the active fleet).

As of August 1, 2002, 53 of the Company's 58 offshore rigs were either committed
or under contract and 19 of the Company's 30 active land rigs were under
contract.

DRILLING MANAGEMENT SERVICES

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Drilling management services revenues decreased by $63.8 million to $95.1
million in the second quarter of 2002 from $158.9 million in the comparable 2001
quarter, due primarily to a decrease in the number of turnkey projects
completed. The Company completed 23 turnkey projects in the second quarter of
2002 (20 wells drilled and 3 well completions) as compared to 44 turnkey
projects in the second quarter of 2001 (38 wells drilled and 6 well
completions).

Drilling management services operating income reflects this decrease in turnkey
drilling activity, declining to $3.5 million in the second quarter of 2002 from
$10.3 million in the second quarter of 2001. Drilling management services
operating margin declined to 3.7% for the second quarter of 2002 from 6.5% for
the comparable prior year quarter due primarily to lower margins achieved on the
turnkey wells drilled in 2002. The Company incurred losses totaling $1.6 million
on four of the 23 turnkey projects completed in the second quarter of 2002
compared to losses totaling $6.8 million on five of the 44 turnkey projects
completed in the second quarter of 2001. Results for the second quarters of 2002
and 2001 were favorably affected by downward revisions to cost estimates for
certain wells completed in prior periods. Such revisions increased segment
income by $1.9 million and $0.6 million, respectively. The effect of these
revisions, however, was offset by the deferral of turnkey drilling profit
totaling $3.7 million and

28

$2.9 million, respectively for the quarters ended June 30, 2002 and 2001, on
wells in which Challenger Minerals, Inc. ("CMI"), a wholly-owned subsidiary of
the Company, was either the operator or held a working interest. The deferral of
this profit is required under the "full-cost" method of accounting for oil and
gas properties. The Company will recognize this profit through a reduction in
depletion expense over the productive lives of these wells.

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Drilling management services revenues decreased by $63.0 million to $182.3
million in the six months ended June 30, 2002 from $245.3 million in the
comparable 2001 period, due primarily to a decrease in the number of turnkey
projects completed. The Company completed 46 turnkey projects in the first half
of 2002 (38 wells drilled and 8 well completions) as compared to 72 turnkey
projects in the comparable period of 2001 (59 wells drilled and 13 well
completions).

Drilling management services operating income, however, increased to $11.2
million for the six months ended June 30, 2002 from $10.8 million in the same
period in 2001, due primarily to a $4.1 million loss recognized in the first
quarter of 2001 on a turnkey well drilled offshore Louisiana, along with an
additional $1.5 million of revenue earned in the first quarter of 2002 related
to a turnkey well drilled in the North Sea in December 2001. Drilling management
services operating margin improved to 6.1% for the first half of 2002 from 4.4%
for the comparable prior year period. The Company incurred losses totaling $1.6
million on four of the 46 turnkey projects completed in the first half of 2002
compared to losses totaling $7.8 million on nine of the 72 turnkey projects
completed in the comparable period of 2001. Results for the first half of 2002
and 2001 were also favorably affected by downward revisions to cost estimates of
wells completed in prior periods totaling $2.8 million and $2.0 million,
respectively, offset by the deferral of turnkey drilling profit totaling $5.7
million and $4.4 million, respectively, related to wells in which CMI was either
the operator or held a working interest.

OTHER INCOME AND EXPENSE

General and administrative expenses increased to $12.9 million and $24.9 million
for the quarter and six months ended June 30, 2002, respectively, compared to
$6.3 million and $11.9 million, respectively, for the comparable periods of 2001
due primarily to increases in personnel from the inclusion of Santa Fe
International operations as a result of the Merger. Included in general and
administrative expenses for the three and six months ended June 30, 2002 are
approximately $1.8 million and $3.8 million, respectively, of "transition
expenses," which represent costs incurred as part of the integration of the
operations of Global Marine and Santa Fe International. Such costs are not
considered to be indicative of the Company's ongoing operations. The Company
expects to incur a total of $6.1 million of general and administrative
transition expense, all of which is expected to be incurred in 2002.

Interest expense, net of capitalized interest, decreased to $10.0 million and
$21.1 million, respectively, for the three and six months ended June 30, 2002
compared to $14.1 million and $28.2 million, respectively for the same periods
in 2001, due primarily to the capitalization of approximately $4.3 million and
$7.5 million, respectively, of interest in the three and six months ended June
30, 2002 in connection with the Company's rig expansion program discussed in
"Liquidity and Capital Resources - Financing and Investing Activities." Global
Marine had no construction program in progress in 2001 and, therefore, the
Company did not capitalize any interest costs in 2001.

29

Interest income increased to $3.8 million and $8.2 million for the three and six
months ended June 30, 2002, respectively, from $3.1 million and $6.0 million for
the comparable 2001 periods, due to increased average cash, cash equivalents and
marketable securities balances primarily as a result of the Merger and cash
generated from operations, offset in part by lower interest rates earned in 2002
on the Company's cash, cash equivalents and marketable securities balances.

INCOME TAXES

The Company's effective income tax rates for financial reporting purposes were
approximately 11.6% and 10.5%, respectively, for the three and six months ended
June 30, 2002 as compared to 29.5% and 27.7% for the same periods in 2001. The
lower effective tax rates for the 2002 periods are due in part to the addition
of the Santa Fe International operations, which increased earnings in
international jurisdictions that are taxed at generally lower rates. The
effective tax rate was further lowered by approximately $27 million of reduced
annual tax costs related to interest expense on intercompany debt
incurred in the Merger.

The Company is a Cayman Islands company and the Cayman Islands does not impose a
corporate income tax. Consequently, income taxes have been provided based upon
the tax laws and rates in effect in the countries in which operations are
conducted and income is earned. The income taxes imposed in these jurisdictions
vary substantially. The Company's effective tax rate for financial statement
purposes will continue to fluctuate from quarter to quarter and year to year as
the Company's operations are conducted in different taxing jurisdictions.

Recently, several members of Congress have introduced various pieces of
legislation that, if enacted, could adversely affect the Company's United States
federal income tax status. Much of the proposed legislation targets United
States corporations that have expatriated to a foreign jurisdiction and would in
certain cases treat such corporations as United States corporations for United
States federal income tax purposes. Several of the proposals would have
retroactive application and would apply to treat the Company as a United States
corporation. Some of the proposed legislation would impose additional
limitations on the deductibility for United States federal income tax purposes
of certain intercompany transactions, including intercompany interest expense.

At this time, it is impossible to predict what legislation, if any, may be
enacted, and if enacted, what effect it may have on the Company. However, there
is a risk that new legislation could substantially increase the income tax costs
of the Company. If this were to occur, such changes could have a material
adverse effect on the Company's financial position and future results of
operations.

LIQUIDITY AND CAPITAL RESOURCES

FINANCING AND INVESTING ACTIVITIES

The Company has definitive contracts with PPL Shipyard PTE, Ltd. of Singapore
for construction of two ultra-deepwater semisubmersibles and two
high-performance jackups, with options for two additional similarly priced
semisubmersibles, and up to four additional jackups, the first two of which are
similarly priced. Projected cash outlays in connection with construction of the
two ultra-deepwater semisubmersibles, excluding capitalized interest, are
expected to total approximately $570 million, or

30

$285 million per rig. Of the $570 million, $171 million had been incurred as of
June 30, 2002. A total of approximately $198 million is expected to be incurred
in 2002, including approximately $68 million incurred during the first half of
2002, and an additional $269 million is expected to be incurred through 2004.
Projected cash outlays in connection with the construction of two
high-performance jackups, excluding capitalized interest, are expected to total
approximately $254 million, or $127 million per rig. Of the $254 million, $94
million had been incurred as of June 30, 2002. A total of approximately $134
million is expected to be incurred in 2002, including approximately $42 million
incurred during the first half of 2002, and an additional $68 million is
expected to be incurred through 2004. The first of two high-performance jackups,
the Constellation I, is scheduled for delivery in the first quarter of 2003, and
the first of two ultra-deepwater semisubmersibles, the Development Driller I, is
scheduled for delivery in the fourth quarter of 2003. The Company expects to
fund the construction of the rigs from its cash and short-term investments and
future cash flow from operations; however, the Company may borrow a portion of
the required funds if conditions warrant. None of the four vessels that the
Company has under construction or has firm commitments to build has secured a
contract for deployment upon completion. The Company can make no assurances that
it will be able to obtain contracts for any of its new or existing rigs.

Other significant financing and investing activities during the six months ended
June 30, 2002 were as follows:

o Completed the sale of the Key Bermuda jackup drilling rig to
Nabors Drilling International Limited for $29 million, less
selling costs of approximately $5 million.
o Received approximately $42 million, including interest, related to
the sale of the Glomar Beaufort Sea I concrete island drilling
system, which was sold to Exxon Neftegas Limited in June 2001. The
Company sold the Glomar Beaufort Sea I for $45 million and
received $5 million at closing. The remaining amount, plus
interest, was recorded as a receivable, which was classified in
Other Assets in the Consolidated Balance Sheet at December 31,
2001.
o Paid quarterly dividends of $0.0325 per ordinary share for the
fourth quarter of 2001 and the first quarter of 2002. These
dividend payments totaled $15.2 million for the six months ended
June 30, 2002.
o Announced in June 2002 that the Company's Board of Directors
declared a regular quarterly cash dividend in the amount of
$0.0325 per ordinary share. The dividend in the amount of $7.6
million was paid on July 15, 2002, to shareholders of record as of
the close of business on June 28, 2002.

Subsequent to June 30, 2002, the Company funded a total of approximately $30.7
million of accrued pension liabilities related to its various pension plans. As
a result of this payment, the Company is approximately 100% funded with respect
to its actuarially determined pension liabilities as of January 1, 2002.

The Company's debt to capitalization ratio, including its capitalized lease
obligation, was 18.3% at June 30, 2002 compared to 18.8% at December 31, 2001.
The Company's total debt includes the current portion of its capitalized lease
obligation, which totaled $1.8 million at both June 30, 2002 and December 31,
2001.

FUTURE CASH REQUIREMENTS

As of June 30, 2002, the Company had total long-term debt, including the current
portion of its capital

31

lease obligation, of $937.4 million and shareholders' equity of $4.2 billion.
Long-term debt consisted of $321.5 million (net of discount) Zero Coupon
Convertible Debentures due 2020, $299.7 million (net of discount) 7-1/8% Notes
due 2007, $296.7 million (net of discount) 7% Notes due 2028, and a $19.5
million capital lease obligation.

Annual interest on the 7-1/8% Notes is $21.4 million, payable semiannually each
March and September. Annual interest on the 7% Notes is $21.0 million, payable
semiannually each June and December. No principal payments are due under either
issue until the maturity date.

The Company may redeem the 7-1/8% Notes and the 7% Notes in whole at any time,
or in part from time to time, at a price equal to 100% of the principal amount
thereof plus accrued interest, if any, to the date of redemption, plus a
premium, if any, relating to the then-prevailing Treasury Yield and the
remaining life of the notes. The indenture relating to the Zero Coupon
Convertible Debentures, 7-1/8% Notes, and 7% Notes contains limitations on
Global Marine's ability to incur indebtedness for borrowed money secured by
certain liens and to engage in certain sale/leaseback transactions. After the
Merger, the Zero Coupon Convertible Debentures, 7-1/8% Notes, and 7% Notes
continue to be obligations of Global Marine. The Company has not guaranteed any
of these obligations.

Holders of the Zero Coupon Convertible Debentures have the right to require the
Company to repurchase the debentures as early as June 25, 2005. The Company may
pay the repurchase price with either cash or stock or a combination thereof. The
Company does not anticipate using stock to satisfy any such future purchase
obligation.

Capital expenditures for 2002 are currently estimated to be $627 million,
including $324 million in connection with the construction of the two new
high-performance jackups and two new ultra-deepwater semisubmersibles, $167
million for major upgrades to the marine fleet, $113 million for maintenance
capital expenditures, $21 million for capitalized interest, and $2 million for
other capital expenditures.

In August 2002, the Company's board of directors authorized the Company to
repurchase up to $150 million of its ordinary shares from time to time depending
on market conditions, the share price and other factors.

As part of the Company's goal of enhancing long-term shareholder value, the
Company has from time to time considered and actively pursued business
combinations and the acquisition or construction of suitable additional drilling
rigs and other assets. If the Company decides to undertake a business
combination or an acquisition or additional construction projects, the issuance
of additional debt or additional shares of stock could be required.

SOURCES OF LIQUIDITY

As of June 30, 2002, the Company had $802.7 million of cash, cash equivalents
and marketable securities, all of which was unrestricted. The Company had $707.9
million in cash, cash equivalents and marketable securities at December 31,
2001, all of which was unrestricted.

The Company believes it will be able to meet all of its current obligations,
including working capital requirements, capital expenditures and debt service,
from its cash and short-term investments and future cash flow from operations.
In 2002, the Company estimates that it will use approximately $100 million in

32

excess of cash flow generated from operations, primarily due to increased
capital expenditures related to the drilling rig expansion program and the
retirement plan contributions discussed above in "Financing and Investing
Activities" and its share repurchase program discussed above in "Future Cash
Requirements."

RISK FACTORS

The preceding discussion should be read in light of certain risk factors
inherent in the Company's business and in the oil and gas industry as a whole,
many of which are beyond the Company's control. For a discussion of these risk
factors, see "Risk Factors" under Items 1. and 2. in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001, as supplemented by the
disclosures in this Quarterly Report on Form 10-Q.

RECENT ACCOUNTING PRONOUNCEMENTS

In 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142,
"Goodwill and Other Intangible Assets," SFAS No. 143, "Accounting for Asset
Retirement Obligations" and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." In May 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections." In July 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." The Company
adopted the provisions of SFAS No. 142 and SFAS No. 144 effective January 1,
2002. The Company adopted SFAS No. 145 in the second quarter of 2002.

SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their initial recognition. The provisions of SFAS No. 142:

o Eliminate the amortization of goodwill and indefinite-lived
intangible assets;
o Require that goodwill and indefinite-lived intangible assets be
tested at least annually for impairment (and in interim periods if
certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be
impaired); and
o Require that reporting units be identified for the purpose of
assessing potential future impairments of goodwill.

At June 30, 2002, Goodwill in the Company's Condensed Consolidated Balance Sheet
totaled approximately $379.8 million, substantially all of which was recorded in
connection with the Merger. All of the goodwill recorded in connection with the
Merger has been allocated to the Company's contract drilling segment. The
Company has completed its goodwill impairment testing for 2002 and is not
required to record a goodwill impairment loss for 2002. The amortization of
goodwill existing before the Merger was immaterial.

SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144, among other things:

o Establishes criteria to determine when a long-lived asset is held
for sale, including a group of assets and liabilities that
represents the unit of accounting for a long-lived asset
classified as held for sale;
o Provides guidance on the accounting for a long-lived asset if the
criteria for classification as held for sale are met after the
balance sheet date but before the issuance of the financial
statements; and
o Provides guidance on the accounting for a long-lived asset
classified as held for sale.

33

The adoption of SFAS No. 144 did not have a material impact on the Company's
results of operations, financial position or cash flows.

SFAS No. 145, among other things, addresses the criteria for the classification
of extinguishment of debt as an extraordinary item and addresses the accounting
treatment of certain sale-leaseback transactions. The adoption of SFAS No. 145
did not have a material impact on the Company's results of operations, financial
position or cash flows.

SFAS No. 143 establishes accounting standards for the recognition and
measurement of liabilities in connection with asset retirement obligations, and
is effective for fiscal years beginning after June 15, 2002. The Company does
not anticipate that the required adoption of SFAS No. 143 in 2003 will have a
material effect on its results of operations, financial position or cash flows.

SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, rather than the
date of an entity's commitment to an exit plan. The provisions of this statement
are effective for exit or disposal activities that are initiated after December
31, 2002. The Company does not anticipate that the required adoption of SFAS No.
146 will have a material effect on its results of operations, financial position
or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CASH FLOW AND MARKET VALUE RISK

One of the Company's cantilevered jackup rigs has recently entered into a
two-year agreement containing a variable-dayrate formula based upon crude oil
prices. A second rig is expected to begin work under a similar agreement
beginning in the fourth quarter of 2002. Dayrates under these agreements are to
be calculated based on a sliding scale formula utilizing the arithmetic average
of the daily closing price of Light Sweet Crude on the New York Mercantile
Exchange ("NYMEX"), subject to a maximum of $28.00 per barrel and a minimum of
$12.00 per barrel. As a result, these agreements are subject to risks associated
with fluctuations in crude oil prices. The Company has performed sensitivity
analyses to assess the impact of these risks based on a hypothetical ten-percent
increase or decrease in NYMEX Light Sweet Crude prices at inception of the
agreements. Oil prices are dependent on many factors that are impossible to
forecast, and actual oil price increases or decreases could be greater than the
hypothetical ten-percent change.

The Company estimates that if average oil prices over the life of these
agreements increase by ten percent, undiscounted cash flows received for each of
these agreements over their respective lives would increase by approximately
$8.1 million. Conversely, a ten percent decrease in oil prices over the life of
the agreements would decrease cash flows over their respective lives by
approximately $4.5 million. As of June 30, 2002, the fair value of these
agreements was not material to the Company's financial position or results of
operations.

For further discussion of the Company's exposure to the above risks and other
identified risks, see "Item 7A. Quantitative and Qualitative Disclosures About
Market Risk" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.

34

PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's annual general meeting of shareholders was held on May 14, 2002.
At the meeting, six directors were elected by a vote of holders of the Company's
Ordinary Shares, par value of US $.01 per share, as outlined in the Company's
proxy statement relating to the meeting. With respect to the election of
directors, (a) proxies were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934, (b) there was no solicitation in opposition to
management's nominees as listed in the proxy statement, and (c) all of such
nominees were elected. The following numbers of votes were cast as to the
director nominees: Richard L. George, 209,825,244 votes for and 1,866,974 votes
withheld; C. Russell Luigs, 210,670,515 votes for and 1,021,703 votes withheld;
Robert E. Rose, 210,654,187 votes for and 1,038,031 votes withheld; Stephen J.
Solarz, 210,469,936 votes for and 1,222,282 votes withheld; Nader H. Sultan,
210,600,512 votes for and 1,091,706 votes withheld; and Paul J. Powers,
210,654,337 votes for and 1,037,881 votes withheld. A vote was also taken on
ratification of the appointment of PricewaterhouseCoopers LLP as independent
certified public accountants of the Company and its subsidiaries for 2002, with
208,867,291 votes cast for ratification, 2,114,857 votes against ratification,
and 710,070 abstentions.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1 Form of Notice of Stock Option Grant currently in use for new
stock option grants to non-employee directors under the
GlobalSantaFe Corporation 2001 Long-Term Incentive Plan.

15.1 Letter of Independent Accountants regarding Awareness of
Incorporation by Reference.

99.1 Corporate Governance Policy of GlobalSantaFe Corporation,
adopted May 14, 2002.

(b) Reports on Form 8-K

The Company filed the following reports on Form 8-K during the quarter
ended June 30, 2002:

Date of Report Items Reported Financial Statements Filed
-------------- -------------- --------------------------

April 4, 2002 Item 7, Financial Statements and Exhibits; None
and Item 9, Regulation FD Disclosure

35

36

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

GLOBALSANTAFE CORPORATION
(Registrant)

Dated: August 13, 2002 /s/ W. Matt Ralls
---------------------------------------------
W. Matt Ralls
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer of the Registrant)

37

EXHIBIT INDEX

Copies of the exhibits listed below are submitted with this Quarterly Report on
Form 10-Q, immediately following this index.

10.1 Form of Notice of Stock Option Grant currently in use for new stock
option grants to non-employee directors under the GlobalSantaFe
Corporation 2001 Long-Term Incentive Plan.

15.1 Letter of Independent Accountants regarding Awareness of Incorporation
by Reference.

99.1 Corporate Governance Policy of GlobalSantaFe Corporation, adopted
May 14, 2002.